David Cameron said less but better regulation was the key to good capitalism. Photograph: Daniel Sorabji/AFP/Getty Images

The knighthood awarded to Sir Fred Goodwin, the former chief executive of the Royal Bank of Scotland, will be referred to the honours forfeiture committee, David Cameron has said.

The prime minister said the committee, which has powers to strip recipients of their honours, would take into account a recent critical report by the Financial Services Authority. Goodwin was at the helm of RBS when it was in effect nationalised in 2008 after making a £24.1bn loss.

Responding to questions about Goodwin's knighthood, Cameron said: "I think it is right that there is a proper process that is followed for something of this order. There is a forfeiture committee in terms of honours that exists and it will now examine this issue. I think it is right that it does so.

"Obviously it will want to take account of the Financial Services Authority report which I think is material and important because of what it says about the failures of RBS and what went wrong and who is responsible and the rest of it."

He said the committee rather than the prime minister should make the decision.

In a keynote speech, in which he called for a new form of popular capitalism, Cameron said he expected the cash element of bonuses at the state-owned banks RBS and Lloyds to be restricted to £2,000 for a second year.

He said the remuneration committee of RBS had yet to meet to decide whether to give the RBS boss, Sir Stephen Hester, a large bonus, adding that non-executive directors approved by the government would argue his bonus should be smaller than last year.

"There has been no meeting of the remuneration committee of RBS so no decision has been made," he replied to questions about bonuses at the bank. Referring to Hester, he said: "If there is a bonus, it will be a lot less than last year."

"As a major shareholder in the City we will be repeating what we did last year and restricting bonuses in all state owned banks to £2,000."

He said bank managers, tellers and junior staff were doing their best so there should be a small cash bonus.

In his speech, Cameron put emphasis on wider shareholding, stronger markets and less regulation and said strong markets promoted morality.

"We should use this crisis of capitalism to improve markets, not undermine them," he said.

In a speech in London billed as his attempt to position the Conservatives as the party ideologically and historically equipped to create a responsible capitalism, the prime minister admitted the link between risk, reward and effort had been broken.

He insisted: "We won't build a better economy by turning our back on the free market. We'll do it by making sure that the market is fair as well as free."

Markets can be made to work "by empowering shareholders and using the power of transparency", he said.

He also insisted the answer did not lie in more regulation but less, so long as it was better.

He argued: "While of course there is a role for government, for regulation and intervention, the real solution is more enterprise, competition and innovation.

"Where they work properly, open markets and free enterprise can actually promote morality.

"The fundamental basis of the market is the idea of something for something – an idea we need to encourage, not condemn," he said.

The speech contained little by way of new policy, except to promise to combine 17 different pieces of co-operative legislation into a single bill.

He argued the Conservatives were well placed to reform markets because "we get the free market. We know its failings as well as its strengths. No true Conservative has a naive belief that all politics has to do is step back and let capitalism rip."

Admitting markets can fail, he said: "Uncontrolled globalisation can slide into monopolisation, sweeping aside the small, the personal and the local."

Drawing on the control of the East India Company, the repeal of the corn laws, the Factory Act and William Pitt's reforms of government, he argued that Tory governments had repeatedly controlled capitalism.

He pointed out he had, at the start of his leadership, argued that the previous government's turbo-capitalism turned a blind eye to corporate excess.

Labour, by contrast, had made a Faustian pact with the City encouraging a debt-crazed economy to fund its welfare bill, he said.

He claimed Labour feared standing up to the City and mistook the interests of big business for those of the economy.

"The City, which should have been a powerhouse of competition and creativity, became instead a byword for a sort of financial wizardry that left the taxpayer with all the risk, and a fortunate few with all of the rewards.

"So instead of popular capitalism we ended up with unpopular capitalism."

He praised genuine reward, saying: "When people take risks, with their own ideas, energy and money, when they succeed in a competitive market where anyone can come and knock them off their perch at any time, we should celebrate entrepreneurs who get rich in that way."

But he warned: "Large rewards for failure when companies are suffering means even less is left over for customers and shareholders."

Without giving details, he said the business secretary, Vince Cable, would set out proposals next week, and he also promised to implement the Vickers report on banking designed to separate retail and investment banking.

He also promised to "bust open the cosy collusion between big business and big government that locks small businesses out of public sector contracts – a market worth £150bn a year".

He argued that capitalism would never be free unless there were genuine opportunities for everyone to participate and benefit. He said the answer to better equality of opportunity lay in better education "with academies, free schools, rigour in exams and a complete intolerance of failure".

"In an age when we're having to cut public spending, we are investing more in early years childcare," he said.

He said the task was to create an insurgent economy, arguing Britain was fizzing with business potential and what he admired more than anything was "the bravery of those who turn their back on the security of a regular wage to follow their dreams and start a company".

He ended by arguing for the need to build a fairer economy, saying Britain needed more shareholders, more home-owners, more co-operatives and more entrepreneurs.

There are too many barriers in the way of forming co-operatives, he said: "Right now there are too many barriers in the way, 17 separate and outdated pieces of legislation add cost and complexity."